Recently in Contract Disputes Category

A contract for the sale of goods: one business, or merchant, buys a part from another. They agree on quantity, price, and delivery. The Seller sends the Buyer a purchase order and delivers the goods, and the Buyer pays. It all sounds easy, but as we previously said, a lot can go wrong in a seemingly simple transaction.

What happens if the Buyer asks the Seller to recommend a part but it doesn't work because it's not the right one? What if the Buyer says he needs a part that meets certain specs, the Seller delivers what the Buyer asks for, but the Buyer asks for the wrong thing? What if the Seller says the part meets the specs but it doesn't? Does the Buyer always have to pay for the part or can he return it, and does the Seller always have to take it back?

Some cases illustrate the complexities involved in a contract for the sale of goods better than others. Many times, you can find the most detailed application of the rules in a lower court opinion. One such case isKabbalah Jeans, Inc. v. CN USA Int'l Corp., 26 Misc. 3d 1241(A), 907 N.Y.S.2d 438 (Sup. Ct. Kings County 2010). It's instructive because it shows how rules designed to make things simple can sometimes make things difficult.

In a sale of goods dispute between merchants, the two most important, and meaningful, titles, are Buyer and Seller.

What does a trial attorney do and what does it mean to be a trial attorney? These two seemingly simple questions, with their seemingly simple answers, actually go a long way towards uncovering some of the most common misperceptions about one of the most passionate, and arduous, fields in law. To put it simply, a trial attorney persuades and learns, or learns and persuades; however you put it, he never stops doing either.

Business owners, homeowners, friends and acquaintances have asked those questions many times; often with a knowing smile, an implied understanding that a trial lawyer really is a jack of all trades and master of none. It takes skill to conduct a trial, to be sure, the reasoning goes, but it's not as if a trial lawyer has to know any one particular area of substantive law, or any one particular industry or type of dispute, well, in order to conduct a trial. If you ask anyone that has tried cases, you will find out how far off base that really is. To know how to be a good trial attorney you have to know not only the "how" but also the "what;" in fact, the "what" is so intertwined with the "how" that they really are one and the same thing.

When you try a case the procedure is important. It's a battle and you have to know the rules of engagement so you can use them honestly and fairly to your client's advantage. Every trial lawyer knows that what you don't know can and will hurt you, but realizes that knowing more than your opponent helps tip the scales in your favor. Of course you need to know the mechanics; how to pick a jury, conduct a direct and cross-examination, give an opening statement and closing argument are all important. The better the trial lawyer the better each is executed.

More important than even knowing how to say something, though, is knowing what to say. You can't know what to say unless you know what you are talking about. After all, isn't a trial really one big chance to persuade a jury that your client is right, and the other side is wrong? How convinced would you be by a bunch of flowery words backed by nothing more than a telling lack of validity rather than a surfeit of substance? Does anyone remember the Wendy's commercial with the tag line, "Where's the Beef?" You definitely don't want to be left holding the big bun with the tiny burger. If that's how the jury looks at your arguments then your client will be left holding the bag.

In order to persuade a jury you have to be credible. In order to be credible the jury has to believe that you know what you are talking about; and the best way to convince them is to actually know what you're talking about. If you pretend, everyone in the courtroom will know it; every juror will see right through the act. If you demonstrate a command of the facts and of the substantive law that governs the dispute, that will come through as clear as day. You will be more credible; the jury will be more likely to accept your arguments; and your client will have a much better chance of success.

Even when a trial lawyer has to learn the facts of a particular type of dispute or area of substantive law, that's exactly what he does; he learns them, inside and out, better and more completely than most. Once learned, much like riding a bike, he does not forget them; he can pick them up again, years later, and never miss a beat.

It is that need to learn that makes a trial attorney. No two cases are the same; there are always surprises even in the most commonplace occurrences. Even a car accident, which is as typical as you can get, can involve a car that goes through the front window of a store and winds up 30 feet inside.

It is the way the trial lawyer learns the case, the facts, the substantive law, that makes all the difference. During the trial he will live it, breathe it, in a way most attorneys never will. It is one thing to study a particular area of the law. It is quite another to apply it in a high pressure situation where your client's case rests on the outcome. The intricacies of contract law might mean one thing to someone who studies them; they take on a whole new meaning when you defend a small company against claims for breach of contract, warranty, and fraud for selling an allegedly faulty part that eventually was placed into hundreds of products and allegedly caused hundreds of thousands of dollars of damage. Reading the law of contracts is one thing. Applying the jury charges for breach of contract, breach of express and implied warranty, fraud, and contract and consequential damages, to the facts of your case, is quite another. Trying them is to know them. Once you know them you don't forget them; in fact, you use them in the next contract dispute and you even use them to avoid the next contract dispute, the next time you draft a contract for a client.

The best way to learn the law is to use the law. There's nothing quite like a trial to focus one's attention on the law, where there is no option other than to use it in the most effective way possible. When you use the law that way, you are forced to understand the law and to actually know it; and that is something that helps everything else a trial attorney does and every other client he deals with. A jack of all trades, maybe; but if he does it right, adept in every single one he touches.

A contract does not always have to be in writing to be enforceable in New York. Most people, including business owners, might think it has to be in writing, but it does not. It must be an agreement, between at least two parties, where each has committed to give up something in order to get something back, and everyone has agreed on the important terms. Those terms, and that agreement, however, do not have to be set down on paper, where each side has signed on the proverbial dotted line. It might be nice to have such a signed document, which is known as an express contract; it might make it easier to prove that there is a contract and what its terms are; but you can still have a valid, enforceable contract without it, if that is what the parties want. In other words, in order to enforce a contract, what you need is a contract, not a writing which shows there is a contract.

Every New York business deals with contracts: sales contracts; purchase agreements; leases, for equipment or for real property such as a store, warehouse, or office; even insurance policies which protect the business, its employees, and its property from loss and damage. Contracts are the means by which a business conducts business. When people, including business owners, think of a contract, they commonly picture a written document, which specifies all of the terms and conditions of the agreement between the parties. A contract, in order to be valid, does not necessarily need to have all of its terms reduced to writing. When there is a written contract, however, it is important that a business owner take the time to read and understand it because, chances are, the business will be bound by the contract in its entirety.

Most businesses believe that they know the terms of a contract before they enter into it, but they often concentrate on what they think are the most important provisions, without being concerned about the rest. Before the typical business enters into a contract, it will know how much money it will spend or how much money it will earn. It will be certain of exactly what it has agreed to sell, to buy, or to lease, and of how long it has to pay or to be paid. Many times, however, a business does not understand, and has not even read, the fine print. That, unfortunately, is a mistake.

In British W. Indies Guar. Trust Co., Ltd. v. Banque Internationale a Luxembourg, 172 A.D.2d 234 (1st Dept. 1991), Plaintiffs sued Defendants, for breach of contract. What makes the case worth noting, however, is what happened as a result: The breach of contract action, which was started in Manhattan, otherwise known as New York County, wound up being moved to Luxembourg. The reason, according to the court, was that the contract contained a forum selection clause, which stated that any disputes between the parties would be decided by the courts in Luxembourg, rather than any place else. At least one of the Plaintiffs claimed it should not be forced to go to Luxembourg, because the person who signed the contract on its behalf did not read that part of the contract and no one specifically brought it to her attention. To be fair, such clauses often are contained in the fine print and often are glossed over. In this case, though, it did not matter. According to the court, such ignorance was no defense; it dismissed the case and allowed Plaintiffs to start over, in Luxembourg, if they chose to do so.

Though it might be unlikely that most businesses would ever get drawn into a dispute that would have to be decided in another country, most contracts do contain a forum selection clause, with the forum selected by the party that drafts the agreement. Before blindly acquiescing to the drafter's request, it might be a good idea to know to where you will have to travel if the agreement breaks down and one party sues the other. Since you will be bound by the forum selection clause, and the other fine print, you might as well take the time to know what you are agreeing to. You may be able to change it to a more convenient forum or you may be able to use it as leverage to negotiate better terms elsewhere in the agreement. Unless you know what the contract actually says, you cannot even try to negotiate a better deal.

Many businesses share a common problem in negotiating and drafting contracts. Rather than resolving all key issues before they enter into a contract, rather than making clear what each party to the contract is obliged to do, and what each is entitled to receive, they allow serious ambiguities to remain in the terms of their agreement. Often the businesses want to gloss over their differences in order to close the deal. The problem with that approach is that ambiguities involving important issues, if not resolved beforehand, often lead to more serious disputes, including litigation, once the parties execute the contract. A recent case decided in New York by the Appellate Division, First Department, illustrates the problems engendered by this approach.

Parcside Equity, LLC v. Freedman, 2012 NY Slip Op 05106, Appellate Division First Department, June 26, 2012, involved a Defendant who entered into a contract in which he made an irrevocable offer to sell his life insurance policies to the Plaintiff. The terms and timing of the contract are the key to understanding the dispute. To begin with, there was no straightforward agreement to sell/buy the policies. Instead, the Defendant/Seller offered, in writing, to sell his policies to the Plaintiff/Buyer at a specific price. The Plaintiff/Buyer, however, could purchase the policies, but was not required to do so.

The central issue in the dispute was simple: The Defendant/Seller wanted to sell one of his policies for a higher price than he originally agreed to, and tried to renegotiate the terms of the offered sale, while the Plaintiff/Buyer evidently wanted to pay the lower, original price offered in the contract. This was expressed in two questions, which essentially mean the same thing. The first was how long the Plaintiff/Buyer could take to accept or reject the offer; i.e., to decide whether to purchase the policies. The second was when, if ever, the Defendant/Seller could withdraw his offer, or, in effect, materially change the terms of the proposed sale.

The written contract provided, in relevant part:

"Performance. This Agreement has been executed first by the Seller as an offer to sell the Policy hereunder, which offer shall be open for acceptance by the Purchaser until 5:00 p.m. on October 17, 2008, at which time the offer shall be deemed to be withdrawn if this contract has not been returned to the Purchaser and in the Purchaser's sole discretion accepted by the Purchaser by that date or any other date selected by the Purchaser."

That contract language was at the center of the dispute. The Defendant/Seller argued it meant that his offer to sell his life insurance policies to Plaintiff/Buyer could be withdrawn after October 17, 2008. If the court agreed, the Defendant/Seller would be allowed to sell the policies for a higher price than he originally agreed to, either by renegotiating with the Plaintiff/Buyer or by finding another purchaser. The Plaintiff/Buyer argued that the same contract language meant the Defendant/Seller's offer to sell was irrevocable; i.e., it could not be withdrawn.

The appellate court interpreted the contract language in favor of the Plaintiff/Buyer. It held that the contract language clearly gave the Plaintiff/Buyer the right to purchase the life insurance policies at the offered terms at any time the Plaintiff/Buyer chose; i.e., once the Defendant/Seller made the offer, it could not withdraw the offer; it was irrevocable. That, however, was not the end of the dispute. In New York, a written offer to enter into a contract that states it is irrevocable, has a time limit even if it does not state one: It is irrevocable only for a reasonable period of time. The court applied this rule, which is embodied by General Obligations Law Section 5-1109, to the facts and found that the Plaintiff/Buyer's acceptance, on December 4, 2008, was within a reasonable time as a matter of law.

We've previously discussed the problem of partial payments being disguised as payments in full, and how this can prevent a New York Business from collecting the full amount a customer owes it. Depositing a check, marked payment in full, normally creates an Accord and Satisfaction, which discharges the remainder of the claim, unless the depositor endorses the check by clearly indicating that he reserves his rights or deposits the check under protest. See UCC 1-207. A check marked "Payment in Full," however, can be defeated; even if deposited without the restrictive endorsement noted above, there still must be a genuine Accord and Satisfaction in order to discharge the remainder of the debt.

It is also important to know that depositing, without a restrictive endorsement, a check marked "Payment in Full," does not automatically establish an Accord & Satisfaction: The business that accepts, and deposits, a check marked "Payment in Full," has to know that, if it accepts that check (i.e. it accepts the lower proffered payment) it will settle or discharge a legitimately disputed claim. See Merrill Lynch Realty/Carll Burr, Inc. v. Skinner, 63 N.Y.2d 590 (NY 1984). This is especially important where there is more than one outstanding, or possible outstanding, claim between the parties.

A partial payment, disguised as payment in full, will discharge the full debt only where it is clear what claim(s) the payment is supposed to satisfy. In Narendra v. Thieriot, 41 A.D.3d 442, 838 N.Y.S.2d 131 (2nd Dept. 2007), the proposed Purchasers of real estate sued a Seller to specifically perform the terms of a real estate contract; i.e. to sell them the property. The Seller sought to dismiss the Purchasers' complaint because, according to the Seller, an Accord and Satisfaction was created when the Seller returned the Purchasers' down payment and the Purchasers deposited Seller's check without protest. According to the court, however, the Purchasers' acceptance of the Seller's check did not create an Accord and Satisfaction discharging the Purchasers' claims for specific performance, because the Seller did not inform the Purchasers that accepting the check would settle the claims for specific performance. Since the Purchasers did not know that accepting the check would relinquish their right to specific performance, they could not and did not knowingly enter into a new contract agreeing to give up that right in return for receiving their down payment back.

There must be an actual, legitimate, pending dispute about a claim before a check marked "Full Payment" is sent, in order for the check to create an Accord and Satisfaction dismissing that claim. Where there is no dispute, or even where there is no dispute yet, there is no Accord and Satisfaction. In Century 21 Kaaterskill Realty v. Grasso, 124 A.D.2d 316 (Third Dept. 1986), Plaintiff sued to collect the remaining balance on a real estate broker's commission. Defendant sought to dismiss the complaint because of an Accord and Satisfaction that it said was created when it sent Plaintiff a check, marked payment in full, for less than the amount of the broker's fees Plaintiff said it was due. Plaintiff deposited the check without protest. The court said there was no Accord and Satisfaction because, before Defendant sent the check, Defendant never disputed the Broker's fees it owed. Since Defendant did not know, before it received Plaintiff's check marked "Payment in Full", that there was a dispute about its broker's fees, it could not have knowingly entered into a new contract by which it agreed to accept the lower amount to satisfy the brokers fees it was due under the original broker's agreement. Even though it deposited the check without protest, Plaintiff still could try to collect the remainder of the Broker's fees it said it was owed.

As can be seen, there are means by which a business can fight to collect the remainder of the money a customer owes it, even if the business mistakenly deposits, without protest, a partial payment disguised as a payment in full. Those means are difficult to establish and do not always apply. If the check is deposited under protest, however, this would be a fight that would not have to be fought.

In our last entry, we spoke about a fairly common problem most New York Businesses have encountered: Where a customer/client makes a partial payment but tries to pass it off as payment in full for the money it owes. We also presented a way a business can protect itself: By placing a restrictive endorsement on the check, a business should be able to collect the partial payment and live to fight to recover the remainder of the debt another day.

The problem, in New York, is based on a legal concept known as "Accord and Satisfaction," which sounds more complex than it actually is. To establish an Accord and Satisfaction, there must be a genuine dispute regarding an unliquidated claim. That could mean that the two parties to a sales contract have a dispute over how much the Buyer owes the Seller for the goods it purchased. For example, the Buyer claims it owes the Seller $700.00, but the Seller insists the Buyer owes it $1,000.00, because that is what they originally agreed to. Next, the parties must mutually resolve that dispute by entering into a new contract which discharges all or part of their obligations under the original contract. This could be an agreement by which the Seller agrees to accept the $700.00 for the goods the Buyer purchased, even though the original contract was for $1,000.00. If the Buyer pays the $700.00, and the Seller accepts the $700.00 without objection, then there is an Accord and Satisfaction, and, as a result, the Seller cannot recover the remaining $300.00 due it under the original sales agreement.

In New York, when one party accepts a check in full satisfaction of a disputed unliquidated claim, the claim is discharged, as an accord and satisfaction. (See, Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., 66 N.Y.2d 321; Merrill Lynch Realty/Carll Burr v. Skinner, 63 N.Y.2d 590). As a result, if there is a dispute about the money a New York Business is owed, and it receives a check marked "payment in full", it should make sure that it does not simply sign and deposit the check. Depositing a "Full Payment Check," that way, is evidence that the business agrees to accept the lesser amount as payment in full. Instead, the business should clearly indicate that it does not accept the check as payment in full. One way to do this is to sign the check with the restrictive endorsement mentioned earlier.

The restrictive endorsement we are discussing is based on N.Y. UCC 1-207, which provides:

A party who with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as "without prejudice", "under protest" or the like are sufficient.

It is important to understand that this gives you a procedural safeguard; it does not guarantee that you will win. It allows you to keep whatever rights you had before you sign the check. It does not give you new rights to the money; it just means that you will have as much of a chance to collect payment in full, after you cash the check for the partial payment as you had before you cashed it. The customer may still have a defense against your claims to what you consider to be payment in full. You still will have to establish the full amount you are entitled to. The bottom line, however, is that you will be able to keep the partial payment and your rights, too; and that's not a bad thing.

Most New York businesses have been involved in fee disputes; where you're trying to collect for goods or services you've sold to another. You know you lived up to your end of the bargain; you gave your customer/client what they asked for. All you want them to do is to live up to their responsibilities; i.e. pay you the price they agreed to, but they don't, haven't, and won't. They always come up with an excuse. They haven't had the time to get to it; they're waiting on someone else to pay one of their bills; the check is in the mail. The bottom line, though, is they still haven't paid the fee they agreed to.

Sometimes, the customer/client does pay something, though it is less than the full amount. Even though it is a partial payment, they indicate right on the check that it is in full satisfaction of all fees they owe you. Many times they'll even cite a statute which they claim backs them up. Many businesses do not know what to do when they face that situation. Often they panic. Though they need the money and are entitled to it, after all they did earn it, they are afraid that if they cash that check they'll forfeit their right to collect the remaining balance of the fees from the customer/client. As a result, they often don't deposit the check; some return the check, and others deposit the check but fail to pursue the customer/client for the remainder of the fees.

At least in New York, there is a way around this problem. Under UCC 1-207, the recipient of just such a check can deposit the check and still maintain its right to proceed against the customer/client to recover the remainder of the money owed to it. Under that statute, a depositor can put a restrictive endorsement on the check before he puts it in the bank to collect the proceeds. The endorsement will include words that make it clear that the depositor does not forfeit his rights under the purchase or sales agreement. These could include such phrases as: Deposited Under Protest/With Reservation of Full Rights/Pursuant to UCC 1-207. At the very least, this will allow a business to live to fight another day; it won't guarantee that you'll recover the money you're owed, but it won't foreclose your ability to try to collect it. At the same time, it will let you deposit the check you've been given, collect at least some of the money you're owed, and thereby make the dispute smaller and, perhaps, more manageable. When the economy is poor, this is something that businesses should be able to utilize to boost their bottom line. It may not be much, but then again, in times like these, every dollar does count.

This is a complicated but common problem encountered by many New York businesses, which we will be spending much time over the coming weeks discussing in detail.